Newmont Goldcorp Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
Newmont is a global gold producer with copper exposure and operations in North America, South America, Australia and Africa. The filing covers the three months ended March 31, 2019 and presents Newmont Mining Corporation’s results before the April 18, 2019 acquisition of Goldcorp. Goldcorp’s results are not included in the quarter.
Newmont acquired Goldcorp in a primarily stock transaction valued at approximately $9.4 billion, issuing approximately 285 million Newmont shares plus approximately $17 million in cash. The combined company is now named Newmont Goldcorp Corporation.
Key financial and operating metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $1,803 million | $1,817 million | Down 1% |
| Net income from continuing operations | $145 million | $169 million | Down $24 million |
| Net income attributable to Newmont stockholders | $87 million | $192 million | Down $105 million |
| Continuing-operations EPS attributable to Newmont | $0.21 diluted | $0.32 diluted | Down $0.11 |
| Adjusted net income | $176 million | $185 million | Down 6% |
| Adjusted EPS | $0.33 diluted | $0.35 diluted | Down 6% |
| Adjusted EBITDA | $687 million | $644 million | Up 7% |
| Operating cash flow from continuing operations | $574 million | $266 million | Up 116% |
| Free cash flow | $349 million | $35 million | Up $314 million |
| Capital expenditures | $225 million | $231 million | Down $6 million |
- Gold sales were $1,739 million in both periods. Gold ounces sold increased to 1.338 million from 1.312 million, but the average realized gold price declined to $1,300 per ounce from $1,326.
- Copper sales declined 18% to $64 million, primarily because pounds sold decreased to 22 million from 27 million. The realized copper price was $2.89 per pound versus $2.88.
- Consolidated gold production rose 4% to 1.337 million ounces; attributable production increased 2% to 1.230 million ounces. Copper production declined 19% to 21 million pounds.
- Gold costs applicable to sales declined to $701 per ounce from $748, while gold all-in sustaining cost declined to $907 per ounce from $943. Copper costs applicable to sales increased to $1.94 per pound from $1.74, and copper AISC increased to $2.26 from $2.07.
- Cash and cash equivalents were $3.545 billion at March 31, 2019. Reported net debt was $828 million, compared with $864 million at December 31, 2018. Borrowing capacity under the revolving credit facility was $2.929 billion, with no borrowings outstanding.
- Total debt was $4.046 billion at March 31, 2019, excluding lease and other financing obligations of $327 million. Scheduled debt repayments included $626 million during the remainder of 2019, $992 million in 2022 and $2.474 billion thereafter.
- The company declared a regular quarterly dividend of $0.14 per share.
Material changes versus the prior comparable period
- Continuing-operations income attributable to Newmont stockholders decreased 34%, primarily because of Goldcorp transaction and integration costs, Nevada joint venture transaction costs and lower realized gold prices.
- Other expense increased to $68 million from $11 million, including $45 million of Goldcorp transaction and integration costs and $12 million of Nevada joint venture transaction and implementation costs.
- Net income attributable to stockholders was additionally affected by a $26 million loss from discontinued operations, compared with $22 million of income in Q1 2018. The 2019 loss primarily reflected a revaluation of the Holt royalty obligation.
- Operating cash flow and free cash flow improved substantially, principally because of collections on receivables and changes in accrued liabilities, including the unfavorable working-capital movements recorded in Q1 2018.
- Gold production benefited from higher grades and a full quarter of Subika Underground production, while lower production at Kalgoorlie, Carlin and Phoenix partially offset gains. Copper production declined mainly because of lower grades and throughput at Boddington.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing a $9 million cumulative-effect reduction to opening retained earnings and additional operating and finance lease assets and liabilities.
Guidance, outlook, commentary and unusual items
- Management emphasized financial flexibility, self-funding of development projects, debt reduction and returning cash to shareholders.
- Ahafo Mill Expansion is expected to begin commercial production in Q4 2019 and is designed to produce approximately 75,000 to 100,000 ounces annually during the first five years beginning in 2020. Development capital since approval was $133 million, including $14 million in Q1 2019.
- Quecher Main achieved first production in late 2018 and is expected to reach commercial production in Q4 2019. It is expected to extend Yanacocha’s mine life to 2027 and produce approximately 200,000 ounces annually on a consolidated basis from 2020 through 2025.
- The Tanami Power Project was completed during the quarter and is expected to reduce power costs and carbon emissions by approximately 20%. The associated arrangements were recognized as finance leases with obligations of $204 million at March 31, 2019.
- Newmont and Barrick agreed to establish a Nevada joint venture in which Barrick will hold 61.5% and operate the venture, while Newmont will hold 38.5%. At the reporting date, the transaction remained subject to regulatory approval; the filing states that Newmont’s contributed Nevada operations would be deconsolidated when the venture commences.
- In April 2019, Newmont paid Goldcorp’s $400 million term loan and $850 million revolving facility, exchanged $2 billion of Goldcorp notes for new Newmont notes, and entered into a new $3.0 billion revolving credit facility expiring in April 2024.
- Management expected to use approximately $1.7 billion of cash during Q2 2019 for the Goldcorp transaction and the $0.88-per-share special dividend, payable May 1, 2019.
- Key risks include volatility in gold and copper prices, operating and geological risks, foreign exchange, permitting, environmental and reclamation obligations, taxation, political and regulatory conditions, joint-venture governance and integration of Goldcorp.
- Environmental reclamation and remediation liabilities totaled $2.499 billion at March 31, 2019. The filing states that the liability for certain environmental remediation matters could be as much as 40% greater or 0% lower than the amount accrued.
- A Yanacocha tax dispute could result in fines and interest of up to approximately $86 million. The filing states that the outcome cannot be predicted.
- No work-related fatalities occurred at Newmont sites during Q1 2019. The filing notes the prior-year loss of six contractors during the Ahafo Mill Expansion project.
Important facts for investors to verify
- Confirm the final purchase price allocation, acquired assets and liabilities, and post-close operating results for Goldcorp in subsequent filings.
- Assess the effect of the Goldcorp acquisition, special dividend, debt repayment, new notes and revolving credit facility on pro forma leverage and liquidity.
- Monitor completion and accounting treatment of the Nevada joint venture, including deconsolidation of Nevada operations and Newmont’s minority ownership and operator dependence.
- Track gold and copper prices, production volumes, grades, recoveries, AISC and the sustainability of the Q1 cash-flow improvement.
- Review the timing, capital requirements and production contribution of Ahafo Mill Expansion, Quecher Main, Yanacocha Sulfides and other development projects.
- Evaluate exposure to reclamation, remediation, tax, litigation and permitting contingencies, including the Yanacocha tax dispute and Ghana lease-related litigation.
- Reconcile management’s non-GAAP measures, including adjusted net income, Adjusted EBITDA, free cash flow and AISC, to GAAP results and review the company-specific definitions.